Canada has great potential to become a global centre for green and sustainable finance. The economy is strong and diversified, with a world-leading financial sector, and a proven capacity for innovation, as evidenced by its technology industry.
The national government is strongly committed to sustainability, with its own strategy to underpin Canada’s transition to a low-carbon economy in the Pan-Canadian Framework for Clean Growth and Climate Change1. But the government has also identified a number of obstacles for the financial sector.
An Expert Panel on Sustainable Finance, appointed by Canada’s Minister of Environment and Climate Change and Minister of Finance, released a report in 20192 that had a number of recommendations, including more and better green finance products and more effective sustainability financial disclosures from businesses and investors.
“Canada has the means and the opportunity to stand among these global leaders as a decision-maker rather than a decision-taker in the global market for sustainable products, markets and growth,” said the report.
“If Canada is to meet its long-term objectives, sustainable finance must become, simply, finance. In other words, climate change opportunity and risk management need to become business-as-usual in financial services, and embedded in everyday business decisions, products and services.”
HSBC’s survey of 180 issuers and investors in Canada largely agrees with these findings. While sustainability and climate change are very important to market participants, they are also feeling hampered by insufficient sustainability disclosures and a lack of data about companies, funds and investment opportunities.
Unlike other regions in our global survey, COVID-19 has not precipitated more caution about risk from investors, nor raised social issues above environmental ones for all market participants. But there remain key obstacles that must be addressed to strengthen the green finance sector in the country.
The journey to sustainability
For both issuers and investors, sustainability is increasing in importance. Only 2 per cent of issuers say they have not made any changes to their activities to make them more sustainable. The rest are at various stages, with 38 per cent moving towards sustainability, 45 per cent laying out sustainability targets and 13 per cent implementing a plan to reach full sustainability, including net-zero carbon emissions. That totals a resounding 98 per cent who have begun making changes to become more sustainable.
Investors are at an earlier stage in their journey. Just 10 per cent say that they already take sustainability issues into consideration in all investment decisions and the majority, 58 per cent, are thinking about sustainability some of the time.
However, of the 32 per cent of investors who do not take sustainability into consideration right now, 59 per cent are planning to do so in the future. And most other investors are planning to increase their commitments more broadly or more deeply.
Challenges lie ahead
When asked about the obstacles to pursuing sustainable finance, investors and issuers differ somewhat, but where they agree, it’s on data and disclosure. They want more information and more prevalent disclosures to help them transition to greener financial decisions.
A significant 48 per cent of investors said they still see challenges in adopting green finance, compared to just 19 per cent of issuers. For investors who see obstacles, their top two factors are the long-term nature of the commitment, cited by 55 per cent, and rather surprisingly, 50 per cent who said that government does not want them to invest in these areas. While national support for sustainable finance appears clear, it may be that these investors are not feeling as supported by provincial policies.
It may also be that market participants are looking for more substantive action from governments. When all investors and issuers were asked what measures would be most effective at encouraging investment in the green and sustainable economy in Canada, 50 per cent said that government or regulators instructing banks and investment firms to consider sustainability in investment and lending decisions would help. A further 42 per cent said that regulatory frameworks for industry, such as easier approvals processes for projects or products, would be effective.
Data is a stumbling block
But issuers and investors see obstacles in the information that’s available, and remedies in measures to improve that information. For issuers who see obstacles, a huge 65 per cent said that the top obstacle was that investment opportunities are not clearly communicated and 25 per cent of investors who see obstacles agreed. A further 48 per cent of challenged investors cited insufficient disclosure as the largest obstacle.
When it comes to measures that would be most effective in encouraging green and sustainable investing, 49 per cent of all market participants want better information to be available about how sustainable individual companies are.
A report from the International Institute for Sustainable Development in 20193 cited climate disclosure as a key foundation for sustainable finance. According to the paper, there are low levels of disclosure in mainstream financial reports by both corporations and financial institutions across the world, mirrored by findings from the Canadian Securities Administrators. It recommended that Canadian laws and statutes be updated to require mandatory disclosures.
What market participants want
Perhaps as an extension of feeling there is a lack of information, Canadian market participants are eager for guidance from banks on sustainability strategies and ESG investing. Issuers particularly reported this need, with 58 per cent saying they want advice from banks on what sustainable investors are looking for and how best to present their sustainability stories. A further 48 per cent would also value advice on clean technologies that they could integrate into their operations.
When it comes to financial advice, issuers seem to be on firmer ground than investors. Only a fifth of Canadian issuers want guidance on issuing green bonds or ESG ratings and as few as 15 per cent want insight into mergers and acquisitions that could make them more sustainable.
Investors, on the other hand, do want guidance on specific financial instruments. There is very strong interest in green deposits, in which money is invested in green projects or assets, and sustainability-linked loans, whose margins can change depending on whether the issuer hits sustainability targets. On both of these, 56 per cent of issuers are keen to hear more. And 46 per cent of investors would like to hear more about social or sustainable bonds.
Despite the obstacles, however, our survey showed strong support from all market participants for activities that help to mitigate the impact of climate change.
Firm commitment to climate change mitigation
Among issuers and investors combined, 51 per cent want more emphasis on reducing air pollution, while 49 per cent call for greater focus on dealing with the problem of plastic that is not recycled.
Making transport more sustainable is important to 44 per cent of all market participants, though it is a greater priority for issuers at 54 per cent, than investors (34 per cent).
Reducing the environmental impacts of agriculture, a prominent issue in a country that is one of the world’s major agricultural producers, was cited by 40 per cent of respondents. But on Canada’s important forestry sector, views are more divided. For investors, it is the most prominent issue, with 46 per cent wanting more effort on sustainable forestry, but only 15 per cent of issuers agree.
Across the issues, however, it’s clear that climate change mitigation is powering a growing consideration of sustainability for both investors and issuers in Canada. While obstacles do remain, issuers in particular have firmly embraced the journey to sustainability and investors are also on the same path.
Continued support from both national and provincial governments is crucial in pushing and perhaps accelerating this journey. Market participants want clearer disclosures, information and guidance and regulatory changes that can fuel their transition to green finance and realise national ambitions to become a world leader in a sustainable future.
2 “Mobilizing Finance for Sustainable Growth”, Final Report of the Expert Panel on Sustainable Finance, June 14, 2019
3 “Leveraging Sustainable Finance Leadership in Canada: Opportunities to align financial policies to support clean growth and a sustainable Canadian economy” International Institute for Sustainable Development, January 2019